Tax Savings on Multistate Loans with Florida Real Estate Collateral
April 1, 2000
If you are applying for a commercial real estate loan with collateral in
several different states, one of which is Florida, there may be substantial tax
savings in store for you. With proper planning, you may reduce the base upon
which you must pay taxes. On the other hand, without proper planning, you may be
bitten by unnecessarily high taxes on your closing statement.
Borrowers with businesses in many states frequently pledge all of their
nationwide real estate collateral for loans. What they do not always realize, is
that if some of the real estate is located in Florida, they are stepping into a
taxable situation. With appropriate assistance, Borrowers can navigate their way
through the tax rules and statutes to significantly reduce their tax liability.
A mortgage or security agreement recorded in Florida which encumbers Florida
property is subject to documentary stamp and non-recurring intangible taxes.
Documentary stamp tax is calculated as 35¢ per $100 and nonrecurring intangible
tax is calculated as .002 per $1 of indebtedness. Usually, the tax is paid on
the entire secured loan amount.
The good news is that there are legitimate opportunities for borrowers to pay
tax on less than the entire secured loan amount. Lower tax bases are available
to borrowers of certain "multi-state loans." Such a loan involves a
promissory note made, executed and delivered outside of Florida with collateral
inside and outside of Florida. The key here is to keep the note outside of
Florida. Compliance with this requirement is very important because otherwise
Florida will tax the note. Proof of compliance should include:
- notarization of the note
- execution of an affidavit by the lender describing the place and date the
note was delivered to him
- overnight courier receipts.
If there is a credit or loan agreement that incorporates by reference terms
of the note, it will be considered part of the note. So it must also be made,
executed and delivered outside of Florida with the same formalities.
A multi-state loan may be secured by a "multi-state mortgage" or
"multiple mortgages." Instead of automatically paying documentary
stamp tax on the full secured loan amount, borrowers may pay it on a lower
"tax base." The tax base calculation depends on the type of mortgage.
A "multi-state mortgage" is a mortgage recorded in Florida which
legally describes both Florida collateral and non-Florida collateral.
The "tax base" for a Multi-State Mortgage would be the value of:
The Florida collateral (real and personal property) + The value of all the
Florida and non-Florida collateral X The amount of the indebtedness secured
A notation to the recording clerk in the multi-state mortgage would include:
(1) the values for each property, (2) the ratio of the Florida collateral
divided by all the collateral, stated as a percentage and (3) legal descriptions
for all real estate collateral. Alternatively, and if acceptable to the lender,
the clerk notation could limit the lender’s recovery against the Florida
collateral to an amount which is less than the secured indebtedness. Then, the
documentary stamp tax would be paid on such limited amount.
"Multiple mortgages" are recorded in more than one state, including
Florida. Each secures the same Multi-State Loan, but the Florida mortgage
describes and pledges only the Florida collateral. The documentary stamp tax
would be paid on the greater of (1) the Tax Base (as calculated above) or (2)
the value of the Florida collateral. However, the tax should not be paid on more
than (a) the amount of the indebtedness secured by the Florida mortgage or (b)
such amount to which the Florida mortgage limits its recovery. A notation to the
recording clerk in the Multiple Mortgages would include: (1) the value for each
property and (2) the ratio of the Florida collateral divided by all the
collateral, stated as a percentage. Or, if there is a limitation on recovery,
the clerk notation would state that amount.
Any notation to the recording clerk should be clearly visible on the first
page of the Florida mortgage, preferably in bold type and capitalized letters.
If there is no notation, the clerk will probably require payment of tax on the
full amount of the indebtedness.
If a multi-state loan is secured by a multi-state mortgage or multiple
mortgages, the intangible tax would be paid on the lesser of (1) the Tax Base
(as calculated above) or (2) the value of the Florida collateral or (3) the
amount to which the Florida mortgage limits its recovery.
Neither the Florida statutes nor the rules indicate how "value" is
to be determined. All values should be obtained from recent appraisals. If there
are none, the common practice is that the borrower and lender agree on the fair
market value to be usedAfter making these calculations, the parties can decide
whether it is more economical to structure their multi-state loan transaction
with a multi-state mortgage or multiple mortgages. The tax savings can be quite
substantial, particularly with very large loans.
However, you must be careful to strictly follow all requirements. Otherwise,
the Florida Department of Revenue may assess interest and penalties in addition
to the amount of any tax deficiency.
With proper guidance, you can significantly reduce the tax line item for
closing costs in your commercial real estate finance transaction.
Lori R. Hartglass is a Real Estate attorney in the Fort Lauderdale office.
Ms. Hartglass can be reached at 954-468-7844 or jhartgla@hklaw.com